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The Economist Newspaper Ltd
Industry: Economy; Printing & publishing
Number of terms: 15233
Number of blossaries: 1
Company Profile:
Protection for your savings, in case your bank goes Bust. Arrangements vary around the world, but in most countries deposit insurance is required by the government and paid for by banks (and, ultimately, their customers), which contribute a small slice of their assets to a central, usually government-run, insurance fund. If a bank defaults, this fund guarantees its customers’ deposits, at least up to a certain amount. By reassuring banks’ customers that their cash is protected, deposit insurance aims to prevent them from panicking and causing a bank run, and thereby reduces systemic risk. The United States introduced it in 1933, after a massive bank panic led to widespread bankruptcy, deepening its depression. The downside of deposit insurance is that it creates a moral hazard. By insulating depositors from defaults, deposit insurance reduces their incentive to monitor banks closely. Also banks can take greater risks, safe in the knowledge that there is a state-financed safety net to catch them if they fall. There are no easy solutions to this moral hazard. One approach is to monitor what banks do very closely. This is easier said than done, not least because of the high cost. Another is to ensure capital adequacy by requiring banks to set aside, just in case, specified amounts of capital when they take on different amounts of risk. Alternatively, the state safety net could be shrunk, by splitting banks into two types: super-safe, government-insured “narrow banks” that stick to traditional business and invest only in secure assets; and uninsured institutions, “broad banks”, that could range more widely under a much lighter regulatory system. Savers who invested in a broad bank would probably earn much higher returns because it could invest in riskier assets; but they would also lose their shirts if it went bust. Yet another possible answer is to require every bank to finance a small proportion of its assets by selling subordinated debt to other institutions, with the stipulation that the yield on this debt must not be more than so many (say 50) basis points higher than the rate on a corresponding risk-free instrument. Subordinated debt (uninsured certificates of deposit) is simply junior debt. Its holders are at the back of the queue for their money if the bank gets into trouble and they have no safety net. Investors will buy subordinated debt at a yield quite close to the risk-free interest rate only if they are sure the bank is low risk. To sell its debt, the bank will have to persuade informed investors of this. If it cannot convince them it cannot operate. This exploits the fact that bankers know more about banking than do their supervisors. It asks banks not to be good citizens but to look only to their profits. Unlike the present regime, it exploits all the available information and properly aligns everybody’s incentives. This ingenious idea was first tried in Argentina, where it became a victim of the country's economic, banking and political crisis of 2001-02 before it really had a chance to prove itself.
Industry:Economy
A lender, whether by making a loan, buying a bond or allowing money owed now to be paid in the future.
Industry:Economy
A loan extended or (sometimes) taken by, for example, delayed payment of an invoice.
Industry:Economy
A method of reaching economic decisions by comparing the costs of doing something with its benefits. It sounds simple and common-sensical, but, in practice, it can easily become complicated and is much abused. With careful selection of the assumptions used in cost-benefit analysis it can be made to support, or oppose, almost anything. This is particularly so when the decision being con templated involves some cost or benefit for which there is no market price or which, because of an externality, is not fully reflected in the market price. Typical examples would be a project to build a hydroelectric dam in an area of outstanding natural beauty or a law to require factories to limit emissions of gases that may cause ill-health. (See shadow price. )
Industry:Economy
The amount a firm must pay the owners of capital for the privilege of using it. This includes interest payments on corporate debt, as well as the dividends generated for shareholders. In deciding whether to proceed with a project, firms should calculate whether the project is likely to generate sufficient revenue to cover all the costs incurred, including the cost of capital. Calculating the cost of equity capital can be tricky (see capital asset pricing model and beta).
Industry:Economy
Being corrupt is not just bad for the soul, it also harms the economy. Research has found that in countries with a lot of corruption, less of their GDP goes into investment and they have lower growth rates. Corrupt countries invest less in education, a sector of the economy that pays big economic dividends but small bribes, than do clean countries, thereby reducing their human capital. They also attract less foreign direct investment. There is no such thing as good corruption, but some sorts of corruption are less bad than others. Some economists point to similarities between bribery and paying taxes or buying a license to operate. Where it is predictable – where the briber knows what to pay and can be sure of getting what it pays for--corruption harms the economy far less than where it is capricious. The absence of corruption has huge economic benefits, however, by allowing the development of institutions that enable a market economy to function efficiently. In many of the world’s more corrupt countries, the distinction between private interest and public duty is still unfamiliar. Countries that have made graft the exception rather than the rule in the conduct of public affairs have been helped to grow by the emergence of institutions such as an independent judiciary, a free press, a well-paid civil service and, perhaps crucially, an economy in which firms have to compete for customers and capital.
Industry:Economy
What consumers do. Within an economy, this can be broken down into private and public consumption (see public spending). The more resources a society consumes, the less it has to save or invest, although, paradoxically, higher consumption may encourage higher investment. The life-cycle hypothesis suggests that at certain stages of life individuals are more likely to be saving than consuming, and at other stages they are more likely to be heavy consumers. Some economists argue that consumption taxes are a more efficient form of taxation than taxes on wealth, capital, property or income.
Industry:Economy
The difference between what a consumer would be willing to pay for a good or service and what that consumer actually has to pay. Added to producer surplus, it provides a measure of the total economic benefit of a sale.
Industry:Economy
What people are usually thinking of when they worry about inflation. The prices paid by whoever finally consumes goods or services, as opposed to prices paid by firms at various stages of the production process (see, for example, factory prices).
Industry:Economy
How good consumers feel about their economic prospects. Measures of average consumer confidence can be a useful, though not infallible, indicators of how much consumers are likely to spend. Combined with measures such as business confidence, it can shed light on overall levels of economic activity.
Industry:Economy